Tax Benefits for Education: Information Center
Tax credits, deductions, and savings plans can help taxpayers with their expenses for higher education. This article provides an overview of the various tax benefits available for education expenses.
Tax Credits
An education credit helps with the cost of higher education by reducing the amount of tax owed on your tax return. There are two education credits available:
- American Opportunity Tax Credit (AOTC): This credit can be claimed for the first four years of post-secondary education. It provides a maximum credit of $2,500 per eligible student. If the credit reduces your tax to less than zero, you may get a refund.
- Lifetime Learning Credit (LLC): This credit can be claimed for any level of post-secondary education, including graduate and professional degree courses. It provides a maximum credit of $2,000 per tax return.
To be eligible for either credit, you must meet the following criteria:
- You, your dependent, or a third party pays qualified education expenses for higher education.
- An eligible student must be enrolled at an eligible educational institution.
- The eligible student is yourself, your spouse, or a dependent you list on your tax return.
Note: If you're eligible to claim both the LLC and AOTC for the same student in the same year, you can choose to claim either credit, but not both. Additionally, nonresident aliens are not eligible for the AOTC unless they elect to be treated as a resident alien for federal tax purposes.
To claim the AOTC or LLC, use Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits). If you claim the AOTC, you must include the school's Employer Identification Number on the form.
Deductions
Student Loan Interest Deduction
If you paid interest on a qualified student loan used for higher education, you may be eligible for a deduction. The student loan interest deduction allows you to reduce the amount of your income subject to tax by up to $2,500.
To qualify for this deduction:
- Your modified adjusted gross income (MAGI) must be less than $80,000 ($160,000 if filing a joint return).
- The loan must be used solely to pay qualified education expenses.
- The loan must be paid or incurred within a reasonable period of time before or after taking out the loan.
- The education must be provided during an academic period for an eligible student.
To claim the student loan interest deduction, use Form 1040's Schedule A. This deduction can be claimed even if you do not itemize deductions.
Business Deduction for Work-Related Education
If you are an employee and can itemize your deductions, you may be able to claim a deduction for work-related education expenses. Your deduction will be the amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses exceed 2% of your adjusted gross income.
If you are self-employed, you can deduct your expenses for qualifying work-related education directly from your self-employment income.
To claim a business deduction for work-related education, you must:
- Be working.
- Itemize your deductions on Schedule A (Form 1040 or 1040NR) if you are an employee.
- File Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040) if you are self-employed.
- Have expenses for education that meet the requirements discussed under "Qualifying Work-Related Education."
Qualifying Work-Related Education
Qualifying work-related education includes education that meets at least one of the following two tests:
- The education is required by your employer or the law to keep your present salary, status, or job. The required education must serve a bona fide business purpose of your employer.
- The education maintains or improves skills needed in your present work.
However, education that is needed to meet the minimum educational requirements of your present trade or business or is part of a program that will qualify you for a new trade or business is not considered qualifying work-related education.
Savings Plans
Qualified Tuition Programs (529 Plans)
States and eligible educational institutions can establish and maintain programs that allow you to prepay or contribute to an account for paying a student's qualified education expenses at a postsecondary institution. These programs are known as Qualified Tuition Programs (529 plans).
Contributions to a 529 plan are not deductible, but distributions from the plan are tax-free if used for qualified education expenses. Qualified expenses include tuition, fees, books, supplies, equipment, and certain room and board expenses.
Coverdell Education Savings Account (ESA)
A Coverdell ESA can be used to pay for qualified higher education expenses or qualified elementary and secondary education expenses. Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax-free until distributed.
Distributions from a Coverdell ESA are tax-free if used for qualified education expenses. These expenses include tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution.
Scholarships and Fellowships
Scholarships and fellowships are generally tax-free if used to pay for qualified education expenses. To qualify for tax-free treatment, you must be a candidate for a degree at an eligible educational institution and use the scholarship or fellowship to pay for qualified education expenses.
Qualified education expenses include tuition, fees, and course-related expenses required for enrollment or attendance at an eligible educational institution. Expenses such as room and board, travel, research, and clerical help are not considered qualified education expenses.
Exclusions from Income
Certain educational assistance benefits can be excluded from your income, meaning you won't have to pay tax on them. However, you can't use these tax-free benefits as the basis for any other deduction or credit.
One example of an exclusion is employer-provided educational assistance. If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year from your income.
For more information on tax benefits for education, including detailed eligibility requirements and forms to use, refer to IRS Publication 970, Tax Benefits for Education. This publication also includes an appendix with an illustrated example and a comparison chart of the various benefits.